Yep! Water weight just wrecks havoc with trying to judge how much fat you've lost (its pounds on the scale, but its not fat). You can definitely lose fat even if you are retaining water because you ate something with too much salt. As long as the calories you take in is less than you burn off, you will lose fat (whether or not the scale goes down).

YUP, absolutely. It is possible to retain water for a whole bunch of reasons, even if and when your body fat goes down. You just won't see the scales budge until the excess water is flushed away...
This is why, for me, the daily fluctuations are hard to take -- I may have worked out really hard and my muscles are retaining water in order to repair; I may have had a stir fry with soya sauce (LOVE this) and may be retaining water due to sodium intake, I may be dehydrated which makes your body hang onto every gram of water that it can...but I will still be in my dietary intake zone for weight loss. And eventually, it does show up on the scales.